My friend Gerhard said I should meet Daryl Klein. But I didn’t want to. Gerhard had invested money with Daryl, who promised returns of 54 percent per year. As a 28 year old, I had been investing for about 9 years. I wasn’t a smart investor. But I was smart enough to know that 54 percent was like the promise of a mermaid in a local swimming pool.
Gerhard invested about $50,000 in Daryl’s company, KleinCorp. Every month, he received 4.5 percent interest directly into his savings account. That was $2,250 a month. After the first year, Gerhard added another $30,000. KleinCorp then boosted Gerhard’s income to $3,600 a month. My friend earned $43,200 in interest every year.
He traveled the world on that income, riding his bike in Thailand and Laos, touring Australia and Hawaii. Year-after-year, he earned $43,200 in interest. He kept saying, “Andrew, you could make a lot of money investing with this guy.” But I still didn’t believe mermaids swam in pools. I still thought it might be a Ponzi scheme.
After six years, Gerhard’s interest totaled more than $200,000. “You have to meet Daryl,” he said, “so he can explain how this amazing business works.” It was tough to see Gerhard making so much easy money, while I earned comparatively measly stock market gains. I told one of my closest friends, Rob. We were both skeptical. But we thought we might have some fun and enjoy a day’s outing to meet the man with the Midas touch.
We drove my old Volkswagen Rabbit one hour south, to the city of Nanaimo, British Columbia. When we arrived, Daryl was smoking a cigarette outside. We introduced ourselves and then Daryl invited us into his office. He explained that his business offered loans to people. He charged his borrowers a high interest rate and a pawnbroker’s fee. “They have to own a vehicle that’s worth at least twice as much as what they’re borrowing,” said Daryl. “Right here in the office, I then put the vehicle in KleinCorp’s name. The borrower is allowed to drive it. But they don’t regain ownership of their car until their debts are paid to me. If they can’t pay the debt, I sell the car to get my money back. That’s how I can afford to pay my investors 54 percent per year.”
Gerhard had already explained this to us, and it sounded nuts when he did. But somehow, hearing it directly from Daryl Klein gave credibility to the crazy tale. That was when Rob and I decided to give the guy some money. It wasn’t long before we lost it.
You might wonder how two skeptics–who believed this was a scam for years–finally gave way to greed. I wondered that for years, until I read Malcolm Gladwell’s latest book Talking To Strangers. Gladwell explains how tricksters can dupe even the most rational people. He writes about former British Prime Minister, Neville Chamberlain. Mr. Chamberlain met Hitler before World War II began. Most of the people who hadn’t met Hitler didn’t believe he could be trusted. Winston Churchill was one of those people. His sentiment came from what Hitler did and wrote. But Chamberlain met der Führer. Hitler looked Chamberlain in the eye. When Hitler said he wanted peace, Chamberlain believed him.
Gladwell references the work of Tim Levine, an expert on deception. Levine says that when we meet somebody face-to-face, and when that person’s face is kind or honest-looking, we usually “default to truth.” Too often, we believe what people say, even if the facts say we shouldn’t.
I’ve spoken to plenty of people who bought poor investment products. They don’t have to be Ponzi schemes. Sometimes, people buy variable annuities. Such investors pay nosebleed fees for really bad products. Other times, they buy expensive actively managed mutual funds. They might even know that index funds are better. But when they’re across from a salesperson with an honest-looking face, their sense of logic often melts. The same thing happens with holiday timeshare sales.
We all make mistakes when assessing other people. Defaulting to truth is a weakness. But it’s also a human strength. Perhaps, when making financial decisions, we should let the facts speak louder than the salesperson’s face.
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Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas